Is Britain's Recovery Too Good To Be True?

There was more good news for the UK economy this morning; the unemployment rate dropped to 7.1% during the three months to December - the biggest ever quarterly increase in employment. This follows the IMF this week raising its (admittedkly terrible track record-based) forecast for the UK economy; it now expects it to grow 2.4% this year which is faster than any other major European economy. Nick Beecroft, Chairman of Saxo Capital Markets UK, is “optimistic” about Britain’s recovery, but has three concerns...

1. The recovery is too dependent on consumer spending. Nick says that in order to feel "really" comfortable about the recovery, he would like to see growth in business investment ans well as consumer spending.

2. The pound is too strong. Nick says sterling, which is at a five year hjigh against the dollar, is getting too strong for the sake of the recovery. The Bank of England is now starting to get concerned about it too. Nick warns there could even be more strength to come, unless we see an adaptation of forward guidance.

Furthermore, as Bloomberg notes, the pound, despite all the rhetoric from the Bank of England, is now almost 2% (on a trade-weighted basis) higher than when the Bank of England said last month that further gains would endanger the economy.

3. Bank of England could lose its credibility. Nick is worried there is now a risk of credibility for BoE Governor Mark Carney. If he wants to keep rates lower but keep the threshold at 7 percent, people may start to ask what value it actually has.

The Bank of England has said it will consider increasing interest rates from the current record low of 0.5 percent when the unemployment rate falls below 7 percent.